Bitcoin

We continue our overview of e-currencies market with review of newcomer to this scene. Bitcoin appeared from virtually nowhere in 2009, and despite the facts that it never had any advertisement campaigns and was developed by almost unknown persons, its gaining popularity and is becoming well known in different communities.

Some call it В«future of moneyВ», others name it В«public enemy number oneВ». What’s the reason of this? Why it attracts so many attention? Let’s look more closely at this payment system. This ecurrency history started in 2008, when Satoshi Nakamoto, mysterious founder of this payment system, write an article named : “Bitcoin: A Peer-to-Peer Electronic Cash System“. The idea was brilliant and very innovative Satoshi suggested something very different from existing monetary system. the new currency was:Totally independent from rates of В«paper currenciesВ» like USD, EUR and etc, and in the same time from precious metals like gold, and any other valuable goods. He suggested truly virtual currency, that is similar to physical gold by many its characteristics (weВґll describe this little below)Not relied on any central issuer, who can flood the market with more currency, causing hyperinflation (main problem of fiat currencies and existing e-currencies)Truly anonymous, untraceable, untaxable. Nobody can get his account frozen by any demand, nobody can ask you to send your passport for verification and ask you questions about your business. Nobody can limit account or reverse any transaction. Almost В«immortalВ», indestructible payment system due to structure. LetВґs describe the systems architecture. Bitcoin is first known “cryptocurrency” based on “peer-to-peer” infrastructure. Sounds terrific, but the idea is simple. Peer-to-peer infrastructure is the same structure, that is using by different torrent trackers, skype and etc. ItВґs decentralized structure, using a distributed database spread across the nodes of a peer-to-peer network to keep track of transactions (check Wikipedia for detailed information, in two words itВґs a network that is not based at client-server architecture, every client is acting as a server for other client). Cryptography is used for security purposes, and for checking transactions for validity and uniqueness (preventing the double-spend problem, where a user is able to spend the same В«coinВ» twice). The idea was revolutionary, but without the development of software, it would be just idea. So, Satoshi had teamed with specialists like Gavin Andresen and others (full list is at official website) to bring the project into reality, and in the beginning of the year 2009 the system started to work! From that time, its popularity and price began to grow exponentially in May 22, 2010 one user of bitcoin forum was asked about exchanging 10000BTC for a pizza, but now this amount is worth of $100,000 or more! As I already told, bitcoin uses its own currency, based in В«coinsВ» (1 BiTCoin is usually named 1BTC). Bitcoin monetary system differs much from usual scheme based on fiat currencies, BTC it is more like gold grams. The main difference between bitcoin and gold-based e-currencies is that if gold-based ecurrencies (like Pecunix for example) have some known relation to fiat currencies and you usually can see your balance in USD, EUR, etc any time, in case of Bitcoin there is nothing like that. Only bitcoin users are deciding, what the price of 1BTC will be (the rate is establishing by markets, where BTCs are trading to other currencies). Right now you can’t send someone $10 worth of BTC, you can only send some amount of BTC from 0. 01. It’s not so convenient for most users, but if gold-based ecurrencies have established market places to check rates at, like kitco. com and etc, in case of bitcoin such markets are just developing. So maybe, in future releases of software BTCs will be connected some way to existing currencies or gold. How I can compare BTC and good old gold and other precious metals, loved by many etc., you can ask? Well, let’s see how BTCs are appearing in this world, and you’ll get what I’m talking about. There is one and only way and it’s called В«miningВ» (or generation). This is not easy process, it takes many time and resources, and with increasing of miners amounts, the process of mining is becoming more and more hard. This is one of reasons why bitcoins are not cheap and their price is growing. Is not that all familiar to something? Let’s look more there is another feature overall number of bitcoins, that are in circulation is limited to 21 millions, and when this amount will be reached, new BTCs will not be generated any more. That is great protection again inflation, and like precious metals, in the long term bitcoin price is only growing. Of course, it’s little early to speak about really long term, but tendencies can be seen even today. What exactly is mining? I’ve described that process from the users point of view in my previous article : “Easy ways to earn bitcoins“, now let’s look at this globally. All computers, participating in mining are doing complicated calculations, using in cryptography (hashing data against a function to say exactly, but I guess that this sounds like foreign words to most of blog auditory, including author)). Basically that means that miners are helping the system to function correctly, also in future that huge computer power will be probably used for other complicated mathematic calculations (that will help to attract money for ensuring BTCs, but founders plans regarding that are unknown to public). Right now the only system gain is voluntary transaction fee, I will describe that little below. To encourage miners, every 10 minutes (approximately) system generates a В«pileВ» of coins, and the user who was lucky enough to generate “valid block of data” (if you want to understand what this means, welcome to the official wiki page about mining) gets the whole bounty. Due to this facts and growing competition in this field, the process of mining requires large computing power. Please read my article about ways of mining if you want to participate in “gold fever of a new millennium”. Mentioned above bounty is now 50BTCs, and due to fact that overall bitcoins amount is limited, the pile size is lowering two times every 4 years (so, in the year 2015 it will be 25BTCs and etc). After 22 years overall amount will reach its limits, and it will become impossible to generate new bitcoins. Another great feature of bitcoin, is that it don’t have any obligatory fees at all, and this is not a temporary marketing move from founders to gain popularity! When you are making transaction, you are proposed to pay voluntary transaction fee of 0. 01BTC. If you will pay it, your transaction will be performed instantly, if not you will have to wait some minutes to gain confirmations. Remember, it’s a peer-to-peer system, so every transaction virtually have to pass through few other clients (if saying more correctly, it has to be checked with few other machines for validity and uniqueness). Minimal spend is now limited to 0. 01BTC, but I suppose that in future this will be changed the price of bitcoin is raising, and if 1BTC will costs lets say $1000, minimal spend will be equal to $10, that is not convenient and making almost impossible to use this ecurrency for micropayments. Every transaction is truly irreversible it’s not virtually “get paid, stay paid” system using by many payment processors, when administration (or even users! ) can sometimes refund transactions and etc. It’s hard to say, is such solution better or not, because in case of any fraud this feature in combination of total anonymity will make fighting fraudsters almost impossible. Actually, with physical gold the situation is almost same. When speaking about bitcoins security system, it’s hard to answer definitely, how secure your funds are. From one hand, this is the only payment system, that will not ask your login and password when you are accessing your account, and that have absolutely unprotected keyfile (certificate, that is used for storing all your money) so your accounts are not secured by default! But, from the other hand, you can build your own security system by crypting your keyfiles and storing them at secure disc (read complete guide, based on your operating system). So, your money are safe when your computer is protected from trojans and hackers attacks, and when you are using cryptography. Other solution is using 3rd party e-wallet providers that will store your bitcoins on their secure servers, and also will provide you with browser-based interface for making transactions. But such practice has risks as well, because all your funds are under total control of third party. I can suggest to wait for appearance of trusted ewallet service, run by people with perfect reputation, meanwhile secure your bitcoins yourself. Next month I will publish article dedicated to securing your funds in various payment processors, including bitcoin. Also you have to remember, that if you’ll lose your wallet. dat file, you’ll lose all your bitcoins irrevocably! I recommend to make backup copy of this file and to store in in secure locations, read technical guide about locating your wallet directory and other things at official wiki. Bitcoins interface is very easy and for setting up your account, you even will not be required to register! All you need to do is visit official Bitcoin website and download small program, depending on your operating system. That’s all! The system will generate your account automatically. There are different localizations available, and the system will determine your language automatically based on your operation system settings (if you will need to change language later, you will have to change wallet files). Account address looks like random numbers and letters, for example: 13NMZJ7zFznQaxxmZPUewx9SpUhATV3xFn and is not easy to remember. There are no names and any information about account available, but you can save this addresses in programs “address book” same as you do with cellphone numbers. Please consider that, although in software you can see history of all sent and received transfers, you will not be able to see from whom you received payment. In order to somehow identify from whom and for what you’ve got money (there is also no memos! ), Bitcoin gives you opportunity to create new account address for each transaction! When you will receive transfer, you can see to which address it is received, and in such a way understand, from whom it is. Like I already told, the interface of bitcoin client is very easy and minimalistic, when I opened it first time, I was pleasantly surprised. The only ecurrency I know, that is using software to access accounts is Webmoney. You will have spend some time to understand how to use their client, but here all is very easy and intuitive with only required minimum of functions. As I told before, not so long time ago it was a problem to find, how to spend your bitcoins, but now you can buy for them virtually everything from electronic goods and services like domains/hosting/software/etc to physical goods at various online shops and even online markets. Yes, Bitcoin has its own ebay analogues! Due to fully anonymous and untraceable transactions, BTCs are often used for selling questionable products like “designer drugs” (substances, that can be used as drugs, but are not yet banned or controlled by authorities, for example this “stimulating bath salt“) and so on. Rumors has it, that there is underground illegal drug market named “The Silk Road“, where one can buy any controlled or illegal substances from marijuana and LSD to cocaine and heroin. That is not surprising, bitcoins are even more anonymous then good old banknotes, so they will be used by different communities, including criminals. Returning to legal merchants, there are also gambling and HYIP-like schemes, read my previous posts about first bitcoin hyip and simple ways of earning bitcoins for more information. Check the full list of merchants, accepting bitcoins for more actual information on what more you can buy for BTCs. How you can see, bitcoin is used and accepted widely enough. Some people even claim it to become “one and only payment system” soon, itВґs an overstatement of course, but I think that this ecurrency can really become one of leaders in market, if will survive first problems that happens with any rapidly growing payment system. When few months ago I had first time encountered post about “revolutionary peer-to-peer cryptocurrency” at one forum, my thoughts was “damn, what the #### they are talking about”, but later, when I could understand the idea I become an admirer of it. And I am not the only one, who made such way. Generally speaking, bitcoins are backed by anything (but looks like this even can become an advantage), and a lot of difficulties in awaiting this project, but due to rapidly growing number of fans we can hope that Bitcoin will have a great future. One thing is already clear the story of this payment system will be exciting, and users (i. e. you) will write this story! Watch for our future articles, we will periodically publish new material about bitcoins, and introduce to you all important events in the life of this amazing ecurrency! If so, please bookmark it, about it, and subscribe to the blog RSS feed.